Saturday, October 1, 2011

Richard Epstein: Obama’s Jobs Bill - Read It and Weep

The dim news about the current economic situation has prompted the Obama administration to put forward its latest, desperate effort to reverse the tide by urging passage of The American Jobs Act (AJA), a turgid 155-page bill. The AJA’s only certain effect is to make everything worse than it already is by asking Congress to tighten the stranglehold that government regulation has already placed on the economy.

That sad fact would certainly elude anyone who accepted the president’s justification for the AJA when he sent the bill to Congress. This bill, he said, will "put more people back to work and put more money in the pockets of working Americans. And it will do so without adding a dime to the deficit." How? Why, by closing "corporate tax loopholes" and insisting that the wealthiest American’s pay their "fair share" of taxes.

What is so striking about Obama’s shopworn rhetoric is its juvenile intellectual quality. His explanation for how the AJA will create jobs is a non-starter because he does not explain how we get from here to there. As in so many other cases, the president thinks that waving a wand over a problem will make his most ardent wishes come true, even when similar earlier efforts have proved to be dismal failures. This dreadful hodgepodge of a bill will likely be dead-on-arrival in Congress, but it remains a patriotic duty to explicate some of its worst provisions.

The most evident feature of the AJA is that it is a combination of ill-conceived, disparate measures. The wandering quality of the bill makes it impossible to cover all of its silliness, but it is possible to focus on some of the core job provisions, all of which kill the very jobs that the AJA is supposed to create.

One does not have to dip very far into the bill to find trouble. Section 4 of the AJA imposes "Buy American" restrictions on the use of funds appropriated under this statute for work on public buildings. "[A]ll the iron, steel and manufactured goods" used on such projects are to be fabricated in the United States. There are obvious administrative difficulties in deciding what counts as a "manufactured good" for the purposes of the act. But don’t sweat the small stuff. The fatal problem with this form of jingoism is that, in the name of economic efficiency, it forces American taxpayers to pay more for less. That upside down logic may seem sensible to a die-hard Keynesian, but not to ordinary people who realize that deliberate overpayment for inferior goods makes no more sense in the public sector than in the private one.

The universal statutory command to "Buy American" is not capable of rigorous enforcement, which brings us to another problem with the bill: It allows its legislative mandates to be waived when the head of the relevant federal agency finds that its enforcement is against the "public interest," including in hard to calculate cases where such deliberations increase project costs by 25 percent. The basic structure of the AJA thus uses large doses of administrative discretion to defang some of its most unrealistic commands. In so doing, it introduces what I have termed elsewhere the vice of government by waiver, where unbridled discretion creates uncertainty and breeds favoritism.

This process only adds to the cost of legislative enforcement. The real jobs created are for government bureaucrats who determine, under rules to be promulgated later, whether the rule or exception applies. The provision has it exactly backwards. The correct piece of legislation should provide that no recipient of funds (assuming there are any) should be allowed to impose "Buy American" preferences—ever.

Section 5 makes the same error as Section 4. One of the lasting shames of American law is the Davis-Bacon Act, passed at the height of the depression in 1931. It guaranteed the payment of "prevailing," i.e. union, wages to workers on government jobs. For those with short memories, the 1931 statute was introduced to keep "itinerant colored workers" from the South from underbidding union workers in the North.

Today, the racial element is thankfully gone, but the economic madness is continued in the AJA, which extends the old Davis-Bacon wage restriction to these new government projects. A sound government tries to pay less for more, not more for less. To be sure, this provision will put more money in the pockets of some working Americans. But it will also take money out of the pockets of others. How this new protectionist measure creates jobs is left unexplained.

The bill only gets worse. Sections 101 and 102 of the Act continue the policies of giving temporary payroll tax cuts and temporary tax credits to employers who hire additional workers. Cutting taxes, of course, is just fine, but the temporary nature of the cuts is wholly counterproductive. The Obama administration has two unflattering views of employers. First, they are cunning ogres who have to be watched lest they exploit or cheat workers. Second, they must be economic lightweights because they are willing to make long-term hiring commitments on the basis of short-term tax credits, like the one offered in the AJA.

The simple truth lies elsewhere. No rational employer will invest much in new jobs on the basis of short-term tax cuts. Employment will take place only when the gains from hiring exceed the transaction costs and taxes on the deal. The statutory provisions of the AJA promote uncertainty because no one can know whether, or for how long, these temporary tax cuts will be extended in the future. These short-term fixes are just another version of government by waiver. What is needed is the exact opposite: a stable tax system that gives people the confidence to hire permanent workers.

Moving on, the extensive program for "teacher stabilization" includes huge chunks of money for the modernization of schools and the stabilization of teacher salaries. As usual, this initiative makes no serious effort to correct the structural defects of our current K-12 educational system or the community college system. The dismal performances of both do not depend on a shortage of funds. What matters in the community college setting has "much more to do with management, organization, culture, personnel, quality of instruction, and availability of support services." The same is surely true with respect to K-12 education.

Thus, it is best to evaluate the AJA’s subsidy programs with a jaundiced eye. Labor unions are the president’s strongest supporters—and one of the most regressive forces in society. It makes sense from a political point of view to channel government funds for infrastructure to union-rich construction and teaching sectors, preferably via Blue State Bailouts. Far better would be efforts to end public unions or to rein them in. The last thing needed is covert union subsidies in the name of the public good.

Moving on, the most ghastly AJA innovation is its new-fangled antidiscrimination law that now makes it essentially illegal to discriminate against unemployed workers. The multiple objections to this provision have been ably summarized by Chicago-based columnist Steve Chapman. Yet they all boil down to one simple point. Hounding employers into hiring unemployed workers will do nothing to create jobs.

The bill’s antidiscrimination provision is intended to prevent employers and employment agencies from stating that all job applicants must be currently employed. Choking off that information is a disservice to just these workers. With countless applicants for each position, nimble employers can easily manufacture some individuated reason to turn down a given worker. So why send desperate workers on a wild goose chase? It is better to have greater job mobility, so that when one worker shifts jobs another place is opened.

There is obviously at least some loose correlation between the inability to get a job today and the ability to hold one tomorrow. It hardly helps the economy to require employers to place their entire businesses at risk by making them hire workers they deem unsuitable. To allow for this possibility, the basic statutory command is quickly attenuated with a giant exception that allows the employer to look at the individual’s employment history and qualifications in making hiring decisions, or by finding out how the applicant has fared in a similar or related job.

This two-step process is yet another reprise of the government by waiver theme. A huge (and unneeded) statutory command is coupled with a giant loophole, leaving it to future generations of administrators to decide, in both individual suits and potential class actions, whether the refusal to hire rests on relevant considerations or not. Once again, the president would have done far better for himself if he had decided not to march his government troops up some regulatory hill, only to march them down again.

The president should have cut back on the discrimination laws now in place rather than creating new such laws. Our vast system of unemployment antidiscrimination laws is costly to enforce. These laws assume, erroneously, that remote administrators have better information as to what characteristics are job-related than the employers whose successful operations depend on making the right calls. Still, it is tempting for government officials to get involved in these employment decisions, especially when they see documented instances of sheer bigotry. The National Employment Law Project, for instance, found that 150 firms, out of literally millions in this country, posted job notices requiring all applicants be currently employed. The AJA’s response was, however, complete overkill.

Put in proper perspective, the jobs act is a classic instance of yet another road to hell paved with good intentions. The greatest protection for all workers is redundancy in the labor market, which only comes when the full range of job restrictions, including the antidiscrimination laws, are consigned to the scrap heap. Once that is done, a few firms may well choose to discriminate on what grounds that everyone, myself included, would regard invidious. But why worry when thousands of others might actually develop innovative hiring and promotion policies after they are freed from an endless set of government restrictions.

The AJA misfires because it starts from unsound economic premises. What a worker needs is a job. Accordingly that worker should worry about the number of opportunities available to him, not the number of closed doors. It is far better therefore to seek a job in a growing economy, in which a small fraction of employers wish to hire you, than in a stagnant economy, in which no one gets hired at all. Judged by these standards, the AJA is an economic nightmare waiting to happen.

No president can conjure up jobs through a mishmash of taxes, subsidies, and regulations. President Obama’s last and only chance is to reverse course and to help to reinvigorate the economy with low taxes and free labor markets. Unfortunately, the president is incapable of understanding this point. Let us hope that the Congress and the American people get the message now, for otherwise the unemployment picture will be worse in a year—just in time to vote Barack Obama out of office.

Richard is a Senior Fellow at the Hoover Institution, a Professor of Law at New York University Law School, and senior lecturer at the University of Chicago. He blogs at Defining Ideas.


R Cressy said...

"President Obama’s last and only chance is to reverse course and to help to reinvigorate the economy with low taxes and free labor markets".

Can any one give me an example of a country that has followed this path and created a society where every one is doing well or even where the country and a few at the top are doing well?

Ray said...

Cressy, unfortunately no, and I suspect nobody can or will even try. Read the history of the free market approach as espoused by the "Chicago boys" from way back and where it has been tried and where it has failed.

R Cressy said...

A quote from Mr Epstein

To lawyers and economists in the classical liberal tradition, it is a good thing, not a bad thing, if the richest person in society gets richer—so long as no one else is made poorer.

Well we know what has happened to America now don't we, to many lawyers and economists :o)

Any way back to this article.

You are right Ray no one has given any example yet it is apparently so simple. So why does zero sum not work?